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2 Purchase Planning

2 Purchase Planning 39

2.1 Policy 39

2.1.1 Preliminary Planning 39

2.1.2 Purchase Planning 39

2.1.2.a The Process. 39

2.1.2.b Responsibilities. 39

2.1.3 Market Research 40

2.1.3.a Importance. 40

2.1.3.b Methods. 40

2.1.4 Individual Purchase Plans 41

2.1.4.a Responsibility. 41

2.1.4.b Elements. 41

2.1.4.c Milestones. 42

2.1.5 Supplier-Selection Strategy 42

2.1.5.a General. 42

2.1.5.b Developing Strategies 42

2.1.6 Evaluation Teams 42

2.1.6.a General. 42

2.1.6.b Reports. 43

2.1.7 Performance Evaluation Factors 43

2.1.7.a General 43

2.1.7.b Proposal-Specific Factors 43

2.1.7.c Supplier-Specific Factors 44

2.1.7.d Relative Significance. 46

2.1.7.e Scoring Systems. 46

2.1.7.f Cost or Price. 47

2.1.8 Decision Logic 47

2.1.8.a Use. 47

2.1.8.b Role of Cost or Price. 47

2.2 Planning Considerations 47

2.2.1 Quality Requirements 47

2.2.1.a Policy 47

2.2.1.b Quality Assurance Requirements. 47

2.2.1.c Clauses 48

2.2.1.d Quality Assurance at Origin. 49

2.2.1.e Inspection at Destination. 49

2.2.1.f Quality Assurance in Commercial Purchasing. 49

2.2.2 First-Article Approval 49

2.2.2.a Uses. 49

2.2.2.b General 49

2.2.2.c Solicitation and Contract Requirements 50

2.2.3 Acceptance 50

2.2.3.a Place of Acceptance. 50

2.2.3.b Delayed Acceptance. 50

2.2.4 Warranties 50

2.2.4.a Use. 50

2.2.4.b In Contracts Other than Fixed Price. 50

2.2.4.c Considerations. 51

2.2.4.d Cost. 51

2.2.4.e Marking and Notices. 51

2.2.4.f Terms. 51

2.2.4.g In Commercial Contracts. 52

2.2.4.h Other Purchases. 52

2.2.5 Delivery or Performance Schedule 52

2.2.5.a General. 52

2.2.5.b Use. 52

2.2.5.c Considerations 52

2.2.5.d Delivery Terms 53

2.2.5.e Provisions 53

2.2.5.f F.O.B. Points 54

2.2.5.g Acceptance. 55

2.2.5.h Using Mail 55

2.2.5.i Clause. 55

2.2.6 Liquidated Damages 55

2.2.6.a General. 55

2.2.6.b Use 55

2.2.6.c Rate. 55

2.2.6.d Assessment. 56

2.2.6.e Clause. 56

2.2.7 Postal Service Property 56

2.2.7.a Policy. 56

2.2.7.b Solicitations. 56

2.2.7.c Special Tooling and Test Equipment 56

2.2.7.d Clauses 57

2.2.8 Options 58

2.2.8.a Use 58

2.2.8.b Evaluating Options 59

2.2.8.c Setting Limits. 59

2.2.8.d Prices. 59

2.2.8.e Expressing Options in a Contract. 59

2.2.8.f Clauses. 60

2.2.8.g Exercising Options. 60

2.2.9 Multiyear Contracts 60

2.2.9.a General. 60

2.2.9.b Solicitations. 60

2.2.9.c Types. 60

2.2.10 Value Engineering 61

2.2.10.a General. 61

2.2.10.b Definition. 61

2.2.10.c Sharing Savings. 61

2.2.10.d Noncompetitive Purchases 61

2.2.10.e Evaluation 62

2.2.10.f Withdrawal. 62

2.2.10.g Acceptance 62

2.2.10.h Subcontracts. 62

2.2.10.i Clause. 62

2.3 Specifications and Statements of Work 63

2.3.1 Use 63

2.3.1.a Specifications 63

2.3.1.b Statements of Work 63

2.3.1.c Product Descriptions 63

2.3.2 Technical Data Packages 64

2.3.2.a General. 64

2.3.2.b Responsibilities. 64

2.3.2.c Deliverables. 64

2.3.3 Component Parts 64

2.3.4 Construction Specifications 64

2.4 Types of Contracts 65

2.4.1 General 65

2.4.1.a Planning. 65

2.4.1.b Risk and Responsibility. 65

2.4.1.c Flexibility. 65

2.4.2 Selecting a Contract Type 65

2.4.2.a Responsibilities. 65

2.4.2.b Provision and Clause. 65

2.4.2.c Considerations 65

2.4.3 Fixed-Price Contracts 66

2.4.3.a Firm Fixed-Price Contracts 66

2.4.3.b Fixed-Price Incentive Contract 66

2.4.3.c Fixed-Price Contract with Economic Price Adjustment 67

2.4.3.d Clauses - Supplies and Services Contracts 69

2.4.4 Cost-Reimbursement Contracts 69

2.4.4.a General. 69

2.4.4.b Limitations. 69

2.4.4.c Cost Contract. 69

2.4.4.d Cost-Sharing Contract. 69

2.4.4.e Cost Plus Incentive-Fee Contract 70

2.4.4.f Cost Plus Fixed-Fee Contract 70

2.4.4.g Cost-Plus-Award-Fee Contract 71

2.4.4.h Clauses 72

2.4.5 Time-and-Materials and Labor-Hour Contracts 72

2.4.5.a Time-and-Materials Contracts 72

2.4.5.b Labor-Hour Contracts. 73

2.4.5.c Clause. 73

2.4.6 Indefinite-Delivery Contracts 73

2.4.6.a General 73

2.4.6.b Definite-Quantity Contracts. 74

2.4.6.c Indefinite-Quantity Contracts 74

2.4.6.d Requirements Contracts 74

2.4.6.e Ordering 75

2.4.6.f Multiple Awards 75

2.4.6.h Provisions. 76

2.4.6.i Clauses 76

2.4.7 Ordering Agreements 76

2.4.7.a General 76

2.4.7.b Limitations 77

2.4.7.c Content of the Agreement. 77

2.4.7.d Ordering. 77

2.4.7.e Pricing. 77

2.4.8 Basic Pricing Agreements (BPAs) 78

2.4.8.a General. 78

2.4.8.b Use. 78

2.4.8.c Sources. 78

2.4.8.d Restrictions. 78

2.4.8.e Ordering. 78

2.4.9 Letter Contracts 78

2.4.9.a Description. 78

2.4.9.b Use 79

2.4.9.c Limitations 79

2.4.9.d Clauses 80


2 Purchase Planning

2.1 Policy

2.1.1 Preliminary Planning

Organizations normally plan their purchasing needs during the budget process. Because purchase planning should involve everyone with a stake in the outcome, coordination between internal postal business partners should begin as early as possible. Planning for high-dollar purchases should begin in the concept-development phase and consider best value in relation to business strategy and life-cycle management plans. The goal of this preliminary planning is to define the Postal Service requirement to be purchased.

2.1.2 Purchase Planning

2.1.2.a The Process. Purchase planning is the process of establishing objectives and tactics to obtain the best value in a specific purchase. It is done by a purchase team made up of the Postal Service business partners with an interest in the purchase, including the organization requesting the purchase, the purchasing organization, and other organizations needed to help determine best value. The contracting officer responsible for the purchase is the business leader of the purchase team. Purchase planning focuses on the purchasing process, with the understanding that the objectives of the purchase are part of an overall business strategy. Customer satisfaction and business success ultimately define best value in a purchase.

2.1.2.b Responsibilities. Purchase team members have specific roles in purchase planning.

1. The organization requesting the purchase:

(a) Determines the supply or service required.

(b) Helps to identify potential suppliers.

(c) Ensures that funds are available and authorized.

(d) Provides a purchase description.

(e) Prepares a price or cost estimate.

(f) Defines the period of performance or delivery.

(g) Establishes any supplier reporting requirements.

(h) Assists in developing evaluation criteria.

(i) When appropriate, justifies a need to purchase noncompetitively.

2. The purchasing organization:

(a) Through the contracting officer, serves as business leader of the purchase team.

(b) Provides advice and assistance.

(c) Identifies new or competitive sources, including small, minority and woman-owned businesses, and ensures that enough suppliers are available to ensure adequate competition.

(d) Prequalifies supplies and maintains source lists.

3. Other members provide specialized support (for example, legal or technical) or help ensure that business considerations outside the purchasing process are included (for example, maintenance or training).

4. Together, the organization requesting the purchase and the purchasing organization determine additional team members sufficient to ensure a level of expertise for the commodity being purchased.

2.1.3 Market Research

2.1.3.a Importance. Market research is central to sound purchase planning. Market research helps determine:

1. What supplies or services are available.

2. What suppliers are available.

3. How to best state requirements.

4. Whether price or cost estimates are realistic.

2.1.3.b Methods. Market research methods include:

1. Assessing whether commercial products and services meet (or are adaptable to) postal needs.

2. Surveying the state of technology, and the extent and success of commercial applications.

3. Holding industry briefings or presolicitation conferences to discuss postal needs and obtain recommendations.

4. Determining why potential suppliers did not respond to solicitations.

5. Attending conferences and researching commercially-available products, industry trends, product availability, reliability, and prices.

6. Testing and evaluating commercially-available products in a postal operating environment to collect reliable performance data, determine if modifications are necessary, and develop operational cost information.

7. Analyzing the purchase history of an item or service to determine the level of competition, prices, and performance results.

8. Publicizing new specifications and, when appropriate, issuing solicitations for information or planning purposes (see 4.2.2.b) far enough in advance to consider industry comments.

9. Publicizing in the Commerce Business Daily, and other appropriate media, including electronic media, all purchasing or prequalification opportunities (except those for mail transportation; see 4.5.4.d) valued at more than $100,000 (see 3.5.3).

2.1.4 Individual Purchase Plans

2.1.4.a Responsibility. The contracting officer determines the extent of the planning and leads the planning effort. For complex purchases, the purchasing organization, guided by the purchase team, usually prepares the plan. Plans are developed when the purchasing organization becomes aware of a customer's requirement, or receives a purchase request, statement of work, or other information sufficient to begin the planning process.

2.1.4.b Elements. Normally, a purchase plan should include:

1. The purpose of the purchase.

2. A statement of work which may include specifications or a product description (see 2.3.1).

3. The history of purchasing similar supplies or services.

4. Special considerations such as compatibility with other equipment; cost, schedule, or performance constraints; or environmental issues.

5. The cost estimate and availability of funds.

6. The estimated life-cycle cost.

7. Delivery schedule or period of performance requirements, including considerations for shipping f.o.b. destination or origin (see 2.2.5).

8. Potential risks and any plans to reduce them, including contingency plans and alternatives, and bonds.

9. The purchasing method (commercial, special; see Chapter 4).

10. The type of contract (see 2.4).

11. Supplier prequalification plans (see 3.5.2) or other approaches to the purchase.

12. Any proposal-specific performance evaluation factors crucial to the success of the purchase, and their order of importance (see 2.1.7).

13. A supplier-selection strategy, if proposal-evaluation performance evaluation factors will be used (this strategy will become part of the individual plan; see 2.1.5).

14. Sources (see Chapter 3).

15. Justification and approval for a noncompetitive purchase, if appropriate (see 3.5.5).

16. Quality requirements, including warranties.

17. Supplier reporting requirements.

18. Requirements for supplier data and data rights, their estimated cost, and how they will be used (see chapter 8).

19. The potential for alternate agreements on intellectual property (see chapter 8).

20. Postal property or facilities that will be furnished to the supplier.

21. Possible conflicts of interest (see 1.7.7).

2.1.4.c Milestones. The purchase plan must include significant milestones critical to the success of the purchase, including publicizing the purchase, issuing the solicitation, receiving proposals, evaluation, discussions, and any reviews and approvals needed. Once the purchase team has set the milestones, if the contracting officer becomes aware that changes are necessary, he or she must inform the rest of the purchase team.

2.1.5 Supplier-Selection Strategy

2.1.5.a General. To obtain the best value, the purchase team should develop a supplier-selection strategy. The strategy should form the general framework for establishing the aspects of value sought in the purchase and the performance evaluation factors to be used. Purchase teams should remember that supplier-specific factors (past performance and supplier capability, see 2.1.7.c) should always be evaluated even when price may serve as the most important factor (for example, when suppliers have been prequalified). The supplier selection should be reached through the consensus of the purchase team. If consensus cannot be reached, the contracting officer, as business leader of the purchase team, has final responsibility and authority for the selection decision.

2.1.5.b Developing Strategies

1. Before developing a supplier-selection strategy, see 3.3 to make sure the purchase does not require using mandatory sources.

2. The supplier-selection strategy is developed by the purchase team, under the general direction of the contracting officer or purchasing organization. The evaluation team (see 2.1.6) may assist, as well as any other advisers needed.

3. The supplier selection strategy must list the performance evaluation factors, their relative significance, and the performance evaluation method and procedures that will be used for supplier selection. Factors must be tailored to the purchase, and must address all areas that will be considered in determining best value.

4. The strategy must also address how price will be compared with the performance evaluation factors to determine which supplier or suppliers offers the best value.

5. Unless suppliers have been or will be prequalified, strategies may not be designed in order to limit competition. It is good business practice to develop strategies that invite new and emerging suppliers to compete for Postal Service purchases.

2.1.6 Evaluation Teams

2.1.6.a General. When a supplier-selection strategy is needed, the purchase team must establish an evaluation team (which may include members of the purchase team). Its membership depends upon the scope and complexity of the purchase, and the complexity of the performance evaluation factors that will be evaluated. When necessary, people from outside the Postal Service may be named to the evaluation team or as advisors. Caution must be exercised when appointing people outside the Postal Service to evaluation teams in order to prevent conflicts of interest (see 1.7.7).

2.1.6.b Reports. The evaluation team must present its findings to the purchase team in a written report with narrative statements identifying the major strengths and weaknesses of the various proposals. The report will be used to help the purchase team conduct discussions with suppliers and to select the supplier or suppliers offering the best value to the Postal Service.

2.1.7 Performance Evaluation Factors

2.1.7.a General

1. Performance evaluation factors provide vital information to both the purchase team and the supplier: the first by requiring the supplier to describe its approach to the purchase and its past record of performance in the specific area; the second by informing suppliers what particular aspects of value are sought by the Postal Service in relation to the purchase. There are two types of performance evaluation factors (but see 4.3.5.b regarding commercial purchases): proposal-specific, which address aspects of a particular purchase; and supplier-specific, which address aspects central to the supplier being evaluated. The purchase team determines which performance evaluation factors will be used in any one particular purchase. For information regarding the role of price or cost see 2.1.7.f; information regarding performance evaluations is in 4.2.5.

2. Risk of successful performance should almost always be considered as a performance evaluation factor. It may be included as a separate factor, or as an element of other factors.

3. There may be overlaps between supplier-specific and proposal-specific factors. This usually happens when proposal-specific factors cover areas which are also considered in evaluating a supplier's capability, such as production capacity.

4. Suppliers should be evaluated for prequalification in the same manner as for any other purchase.

2.1.7.b Proposal-Specific Factors

1. The appropriateness and proper weighting of proposal-specific factors are essential to effective performance evaluation. The proposal-specific factors should represent the elements of the purchase critical to its success and should be designed to achieve it. Using too many factors should be avoided, as it can unintentionally level evaluation scores (as when high scores for less significant factors offset low scores in more important factors).

2. Proposal-specific factors used in a purchase must be tailored to and consistent with the purchase. Examples of proposal-specific factors include:

(a) The supplier's understanding of the requirement.

(b) The supplier's management plan (including, where appropriate, its subcontractor plans).

(c) The qualifications and experience of the supplier's key personnel.

(d) The superiority of the supplier's technical approach.

(e) The supplier's offered delivery terms (see 2.2.5).

3. Subfactors may be established under any evaluation factor; for example, under "management plan," there could be subfactors for "organization" and "operational concepts."

2.1.7.c Supplier-Specific Factors

1. There are two supplier-specific factors: past performance and supplier capability. Unless price will serve as the deciding factor (see 2.1.7.d), they must be evaluated during the purchasing process regardless of the purchasing method being used.

2. Past Performance

(a) A company or individual that has performed well on previous contracts is likely to perform well on similar contracts in the future. Including past performance as an evaluation factor helps ensure quality suppliers.

(b) All past performance evaluations must include the following factors:

(1) Quality (a record of conformance to contract requirements and standards of good workmanship).

(2) Timeliness of performance (adherence to contract schedules, including the administrative aspects of performance).

(3) Business relations (a history of being reasonable and cooperative with customers; commitment to customer satisfaction; integrity and ethics).

(4) Cost control (a record of forecasting and containing costs on changes and cost-reimbursement contracts).

(5) Supply chain management (the supplier's management of total material flow from all levels of subcontractors).

(c) When evaluating past performance, emphasis should be placed on similar contracts with the Postal Service. Overall performance for private and public sector customers should also be reviewed. If a newly-established supplier cannot provide past performance information, the past performance of the supplier's key personnel on similar projects may be evaluated.

(d) The review of past performance should generally be limited to contracts completed within the last 3 years. However, longer periods may be reviewed when the purchase team deems they are appropriate.

3. Supplier Capability

(a) Supplier capability is evaluated in order to determine a supplier's ability to perform upon award of a contract. It should be used as a snapshot of the quality and reliability of that performance. The supplier must demonstrate its current capability. For joint ventures, each party must be deemed capable.

(b) Certain key areas must be considered when determining a supplier's capability. To be deemed capable, the supplier must:

(1) Have, or have the ability to obtain, resources (financial, technical, etc.) adequate to perform the work.

(2) Be able to meet the required or proposed delivery schedule, considering all existing commitments, including awards pending.

(3) Have a sound record of integrity and business ethics.

(4) Have, or have the ability to develop, a sound quality control program that complies with solicitation requirements.

(5) Have the necessary organization, experience, accounting and operational controls, technical skills, and production and property controls.

(6) Have, or have the ability to obtain, the necessary production, construction, and technical equipment and facilities.

(7) Be otherwise qualified and eligible to receive an award under applicable laws and regulations.

(c) Certain business information must be obtained in order to determine that a supplier is capable. Sources of this information include:

(1) The Postal Service list of debarred, suspended, and ineligible suppliers (see 3.5), and GSA's consolidated list of suppliers debarred, suspended or declared ineligible by other government agencies.

(2) Records and experience data, including the knowledge of other contracting officers, purchasing specialists, and audit personnel.

(3) The supplier's proposal information, business profile, financial data, information on production equipment, production data, questionnaire replies and personnel information.

(4) Subcontractors, customers, financial institutions, and government agencies who have done business with the supplier.

(5) Business and trade associations.

(d) If the required information and discussions (see 4.2.5.c) do not provide an adequate basis for determining capability, purchase teams may conduct a preaward survey, with the assistance of any needed specialists. The extent of the survey must be consistent with the dollar-value, complexity or sensitivity of the purchase, and may include any of the following:

(1) Data on hand or from other government or commercial sources.

(2) Examination of financial statements and records.

(3) On-site inspection of plant and facilities to be used in contract performance.

(e) Each participant in the preaward survey must make a written report of his or her findings, which must be included with the capability determination. If more efficient, consolidated reports may be used. Documents and reports regarding a determination of capability must be included in the contract file. Information obtained for a determination of capability must not be disclosed outside of the Postal Service, unless disclosure is required by the Freedom of Information Act (see 1.7.4).

(f) Generally, suppliers are responsible for determining the capability of their subcontractors (but see 3.7 regarding debarred, ineligible or suspended firms), and may be required to provide evidence of a subcontractor's capability. Subcontractor capability considerations may affect whether the prime supplier is deemed capable. When necessary, subcontractor capability may be determined using the same criteria used to determine prime supplier capability.

2.1.7.d Relative Significance. Solicitations must indicate the relative significance of the identified performance evaluation factors and the relationship of those factors to the solicitation's cost/price factors. All evaluation factors must be clearly stated in enough detail to give suppliers a reasonable opportunity to understand the aspects of value important to the Postal Service. When there are known sources capable of meeting the postal requirements with products of sufficient quality, or when suppliers have been prequalified, price may be the determining factor. In these cases, however, past performance and supplier capability should be reexamined before awarding the contract. When factors other than price are used, their relative significance should correspond to their value to the Postal Service. For example, when factors must be established to ensure minimal technical acceptability, but technical superiority at additional cost would be of no benefit, the selection should be based on price from among the proposals evaluated as minimally acceptable (see 2.1.7.f).

2.1.7.e Scoring Systems. Many forms of scoring systems are suitable for performance evaluation, from adjective ratings to numerical systems, and some are more suitable than others depending on the situation. However, the scoring system should be simple and practical.

2.1.7.f Cost or Price. Cost or price factors (including, when appropriate, cost-related factors such as life-cycle costs and the like) are treated separately from performance evaluation factors. The relationship of cost/price factors should be stated in general terms (for example, that cost/price will be considered to be more important, less important, or as important as the performance evaluation factors, or that cost/price will be the determining factor in choosing among all offers which meet the minimum acceptable performance evaluation factors), and no solicitation should establish a strict mechanical relationship between the cost/price factors and any other factors.

2.1.8 Decision Logic

2.1.8.a Use. Using sound decision logic helps ensure that the contract is awarded to the supplier offering the best value. In establishing this logic, the relative importance of the evaluation factors and their interrelationships in various combinations must be determined.

2.1.8.b Role of Cost or Price. When performance evaluation factors other than price are used, the decision logic must compare price differences with the value of other differences to determine which proposal offers the best value.

2.2 Planning Considerations

2.2.1 Quality Requirements

2.2.1.a Policy

1. The Postal Service holds the supplier responsible for providing supplies or services in conformance with the purchase requirements, and to provide reasonable assurance that requirements are met. The Postal Service retains the right to verify the provided supplies and services through process audits, inspections and testing.

2. The purchasing team must determine what quality requirements are needed, and the contracting officer must put them in all solicitations and contracts. The type and extent of contract quality requirements depend on the purchase and the Postal Service's experience with suppliers. The quality requirements may range from acceptance inspection to a quality assurance program.

3. Suppliers are responsible for complying with contract requirements, and the Postal Service may verify that the supplier is doing so. Some contracts may call for specialized inspections or tests to be performed by the Postal Service or a third party.

2.2.1.b Quality Assurance Requirements. In most cases, the supplier performs all necessary inspection and testing for conformance before delivery. In deciding whether the Postal Service should opt to test or inspect supplies or services before delivery, the purchase team should also consider:

1. The existence and use of a quality assurance system that ensures that the production processes used by the supplier are within control and are properly monitored, and that items are being tested and inspected thoroughly enough to ensure that they will be in conformance when delivered.

2. The type of supplies or services being purchased (for example, commercially available or postal unique) and their intended use.

3. Potential losses due to defects.

4. The likelihood of uncontested replacement or correction of defective work.

5. The cost of detailed inspection.

2.2.1.c Clauses

1. The inspection and quality assurance clauses described below:

(a) Require the supplier to maintain a quality system acceptable to the Postal Service and make documentation available.

(b) Give the Postal Service the right to test and inspect while work is in process.

(c) Require the supplier to keep complete records of inspections and make them available to the Postal Service.

2. Use

(a) Clause 2-1, Inspection and Acceptance - Supplies, must be included in all supply contracts not awarded using commercial procedures.

(b) Clause 2-24, Inspection and Acceptance - Supplies - Nonfixed Price, must be included in all supply contracts that are not fixed price.

(c) Clause 2-48, Inspection and Acceptance - Services, must be included in all service contracts not awarded using commercial procedures, except when the service contract will include Clause 2-49, Quality Assurance - Services.

(d) Clause 2-49, Quality Assurance - Services, must be included in all service contracts where the supplier must maintain a quality system subject to Postal Service evaluation when the service is complex, unique or otherwise of a kind that requires a quality system that includes a process management system, a means of assessing customer satisfaction, and active supplier management.

(e) Clause 2-2, Quality Assurance I - Supplies, or Clause 2-3, Quality Assurance II - Supplies, must be included in supply contracts where the supplier must maintain a quality system subject to Postal Service evaluation.

(1) Clause 2-2 covers the production aspects of a supplier's operation and is suitable when requiring production from a technical data package provided by the Postal Service.

(2) Clause 2-3, Quality Assurance II - Supplies, must be included if the Postal Service needs to supervise the supplier's design controls and servicing factors. In addition to requiring production controls, this clause requires the supplier to control processes before and after production (in other words, design and servicing). Typically, this clause would be used for automation purchases that require the supplier to develop, design, produce, install, and test the equipment.

(f) Contracts for Both Supplies and Services. When a contract calls for delivery of both supplies and services, the Inspection and Acceptance clause for the predominant portion (supplies or services) or, if circumstances require a supplier's QA system, the appropriate Quality Assurance clause for the predominant portion, may be used. Or, where appropriate, contracts encompassing both supplies and services may include separate Inspection and Acceptance or Quality Assurance clauses for the supplies and services portions of the work.

(g) Clause 2-23, Reimbursement - Postal Service Testing, must be included when Clauses 2-2 or 2-3 are included in the contract.

2.2.1.d Quality Assurance at Origin. Although it is the responsibility of the supplier to provide supplies or services which conform to contract requirements, the Postal Service retains the right to audit and inspect contract performance during production and before delivery.

2.2.1.e Inspection at Destination. Inspection performed at destination is generally limited to inspecting the supplies or services.

2.2.1.f Quality Assurance in Commercial Purchasing. See 4.3.2.h.

2.2.2 First-Article Approval

2.2.2.a Uses. The purpose of first article approval is to validate the capability of a supplier's production process. Approval is the testing and evaluation of the first article for conformance with contract requirements at the initial stage of production. The first article should be manufactured using the contract drawings and specifications and the production drawings developed from them. The approved first article then serves as the manufacturing baseline for production units.

2.2.2.b General

1. First-article approval is particularly appropriate when the first article will serve as a manufacturing standard or is described by a performance specification. In deciding whether first-article approval should be required, the purchase team should consider the increased costs and time of delivery resulting from first-article tests, the risk of foregoing the tests, and the availability of other, less costly, methods of achieving the desired quality.

2. Normally, first-article approval should not be required for:

(a) Research or development.

(b) Prequalified products.

(c) Commercial products.

2.2.2.c Solicitation and Contract Requirements

1. When the supplier is responsible for first-article testing, the solicitation and contract must contain or reference the performance factors or other characteristics that must be met, including the data that must be submitted in the first-article approval test report; and Clause 2-4, First-Article Approval - Supplier Testing.

2. When the Postal Service is responsible for first-article testing, the solicitation and contract must contain or reference:

(a) The performance factors or other characteristics that must be met;

(b) The tests to which the first article will be subjected; and

(c) Clause 2-5, First Article Approval - Postal Service Testing.

2.2.3 Acceptance

2.2.3.a Place of Acceptance. The solicitation and contract must specify where acceptance will take place.

2.2.3.b Delayed Acceptance. The purchase team may consider using a special testing requirement after delivery and before acceptance (such as a preacceptance test) for purchases of complex equipment (such as mail-handling systems, telecommunications equipment, computers, and building systems). Requirements should be designed to thoroughly test the equipment, and should be described in the solicitation. When a preacceptance test program is specified, the contract must include Clause 2-6, Delayed Acceptance.

2.2.4 Warranties

2.2.4.a Use. A warranty clause should be used when it is in the Postal Service's interest to reserve the right to assert claims regarding defective supplies or services after acceptance. A warranty clause gives the Postal Service additional time after acceptance to require correction of deficiencies or defects, reperformance, an equitable adjustment in the contract price, or other remedies. Warranty coverage may begin with delivery, or when a specific event occurs. This coverage may continue for a given number of days or months, or until the occurrence of another specific event. The value of a warranty clause depends on the supplies or services purchased. The clause, its use, terms, and conditions are influenced by many factors and should be tailored to fit the purchase or a specific type of purchase. Warranty clauses usually increase the purchase price and this should be carefully weighed before deciding to use one (see 2.2.4.c).

2.2.4.b In Contracts Other than Fixed Price. A warranty clause does not limit any rights the Postal Service has under Clause 2-1, Inspection and Acceptance, or Clause 2-24, Inspection-Nonfixed-Price. Because Clause 2-2 allows the Postal Service to have deficiencies corrected during and after performance, warranty clauses, other than those related to computer software, technical data, and copyright (see chapter 8), should not be included in contracts that are not fixed-price.

2.2.4.c Considerations. The warranty clause or provision may be used for either individual purchases or classes of purchases. Before making this decision, the purchase team should consider such matters as the cost of the warranty, potential damage to the Postal Service resulting from defective performance, the ability of the Postal Service to enforce the warranty, etc.

2.2.4.d Cost. Offerors usually include a price estimate for warranty work in their proposals. Because the cost of warranty work might not equal the benefits, the purchase team should carefully evaluate the cost of a warranty by requiring alternate price proposals with and without a warranty; comparing the cost of a separate service contract that provides similar protection; or requiring separate pricing for warranties, when feasible.

2.2.4.e Marking and Notices. When a warranty clause is used, the purchase team should consider requiring the warranted items to be marked or having a warranty notice furnished with the items. This tells people who store, stock, and use the items that they are warranted and encourages them to advise the contracting officer of any defects. The marking or notice need not state the complete warranty; a short statement that a warranty exists, its duration, and whom to notify if an item is defective is usually sufficient. In deciding whether to require marking or a notice, the purchase team should consider the feasibility of marking the items and, the added cost of the marking or the notice in relation to its benefits.

2.2.4.f Terms. The terms of a warranty clause vary with the item or service being purchased, but factors such as the following should be considered:

1. The Schedule must state the warranty's duration. It may provide that the supplier will be liable for defects or nonconformance that either exist at the time of delivery or that develop within a specified period or before the occurrence of a specified event.

2. The schedule must state the specific period during which a notice of defects or nonconformance may be given to the supplier. Generally, the Postal Service will be protected if this "warranty period" starts "at the time of delivery" or "upon acceptance of the service." However, in some cases, it may be necessary to start the warranty period later. For example, if it cannot be determined that supplies conform until they are used, the warranty period should not begin until the items are actually used; or if supplies are purchased in lots inspected by sampling and delivered in increments for storage, the warranty period may begin when the supplies are actually used or from the date of the last delivery.

3. If the Postal Service specifies the item's design and precise measurements, tolerances, materials, test requirements, or inspection requirements, the supplier's liability for defects or nonconformance is usually limited to those that exist at the time of delivery.

4. If a contract contains performance specifications, and design is of minor importance, a supplier's liability may extend to defects that arise after delivery of the supplies or acceptance. When appropriate, the warranty may be limited to defects or nonconformance existing at the time of delivery or acceptance.

5. The right to return nonconforming supplies for correction or replacement generally satisfies the Postal Service's need under a warranty. However, when correction or replacement will not be possible (for example, perishable items), the clause should provide that:

(a) The Postal Service may return the supplies to the supplier, dispose of them in a reasonable manner, or replace them with similar supplies; and

(b) The supplier is liable for any costs incurred by the Postal Service.

6. When it is foreseen that, due to the nature of its use, or the cost of return, it would be impracticable to return an item for correction or replacement, the clause should provide that the Postal Service, at the supplier's expense, may correct or require the supplier to correct the article in its place.

7. A warranty may be required only for a particular aspect of an item that may need special protection (for example, components, accessories, parts, or packaging).

2.2.4.g In Commercial Contracts. See 4.3.7.b.4 and 4.3.7.b.5.

2.2.4.h Other Purchases. Solicitations and contracts for purchases other than commercial purchases must include Clause 2-8, Warranty, modified as needed.

2.2.5 Delivery or Performance Schedule

2.2.5.a General. A realistic delivery or performance schedule is an essential element of a contract and must be stated clearly in the solicitation. Schedules that are unreasonably short or difficult to attain may restrict competition and result in higher contract prices.

2.2.5.b Use. Except when clearly unnecessary, solicitations must inform suppliers of the basis of which their proposals will be evaluated in terms of time of delivery or performance. For example, delivery schedules may be identified as "required" or "desired." If the delivery schedule is expressed as "desired," the solicitation's performance evaluation factors must indicate the extent to which proposals offering more or less favorable delivery terms will be considered and the relationship of that consideration to the other performance evaluation factors.

2.2.5.c Considerations

1. Supplies and Services. When developing delivery or performance schedules for supplies and services, purchase teams must consider applicable matters such as urgency of need, industry practices, market conditions, administrative time needed for evaluating offers and awarding contracts, and the sufficient time for suppliers to comply with conditions affecting performance, such as the furnishing of Postal Service property.

2. Construction. When scheduling the time for completion of a construction contract, purchase teams must consider applicable matters such as the nature and complexity of the project, the construction seasons involved, the required completion date, availability of materials and equipment, and the supplier's capacity to perform.

3. Separable Items and Dates. Separable completion dates may be established for separable items of work in any contract. When multiple completion dates are used, requests for extension of time must be evaluated for each item, and the affected completion dates modified as appropriate.

2.2.5.d Delivery Terms

1. Supplies and Services. Contract delivery or performance schedules may be expressed in terms of:

(a) Specific calendar dates;

(b) Specific periods from the date of the purchase (i.e., date of award or acceptance by the Postal Service, or date shown on the contractual documentation as the effective date of the purchase);

(c) Specified periods from the date of receipt by the supplier of the notice of award or acceptance by the Postal Service (including notice by receipt of contract document executed by the Postal Service); or

(d) Specific time for delivery after receipt by the supplier of each individual order issued under the contract, as in indefinite delivery type contracts.

2. Notice

(a) The time specified for contract performance should not be curtailed to the prejudice of the supplier because of delay in the Postal Service's giving notice of award.

(b) If the delivery schedule is based on the date of the contract, the contracting officer must mail or otherwise furnish the supplier the contract, notice of award, acceptance of proposal, or other contract document not later than the date of the contract.

(c) If the delivery schedule is based on the date the supplier receives the notice of award, or if the delivery schedule is expressed in terms of specific calendar dates on the assumption that the notice of award will be received by a specific date, the contracting officer must send the contract, notice of award, acceptance of proposal, or other contract document by certified mail, return receipt requested, or by any other method that will provide evidence of the date of receipt. In the event that the notice of award is not timely received by the specified date, the delivery schedule must provide that the schedule will be extended by the number of days after the date that the supplier actually received notice of award.

2.2.5.e Provisions

1. Supplies and Services

(a) General. Provision 2-2, Time of Delivery, and its alternatives may be used as provided or adapted as necessary for solicitations and contracts other than those for construction and architect/ engineering services. Because the actual delivery schedule is set out in Section C of the contract schedule and not in the provision, particular care must be taken that the terms of the delivery provision are consistent with the delivery schedule.

(b) Required or Desired Delivery. Paragraph (a) of Provision 2-2 assumes that the solicitation contains a schedule by which delivery is required and that no additional consideration will be given for accelerated delivery. Alternate paragraph (a)(1) may be substituted for paragraph (a) if the schedule includes a desired delivery schedule as well as a required schedule, and if suppliers will not be penalized for their inability to meet the required delivery date.

(c) Alternative Calculations of Performance Time

(1) Paragraph (b) of Provision 2-2 assumes that the delivery schedule will be based on the date of contract award. If the delivery schedule is expressed in terms of specific calendar dates or specific periods and is based on assumed date of award, substitute alternate paragraph (b)(1) for paragraph b.

(2) If the delivery schedule is expressed in terms of specific calendar dates or specific periods and is based on an assumed date the supplier will receive notice of award, substitute alternate paragraph (b)(2) for paragraph (b).

(3) If the delivery schedule will be based on the actual date the supplier receives a written notice of award, delete paragraph (b).

2. Construction. See 4.4.3.a.9 and Clause B-7.

3. For commercial purchasing, see 4.3.

2.2.5.f F.O.B. Points

1. Delivery instructions for supplies must specify an f.o.b. (free on board) point:

(a) F.o.b. destination means delivery, free of expense to the Postal Service, to a destination specified in the purchase document. Title to the supplies passes to the Postal Service when they arrive at the stated destination. The supplier pays the carrier and assumes the risk for loss or damage until delivery to the specified destination.

(b) F.o.b. origin means that the Postal Service makes the arrangements for the pickup, transportation and delivery to the required destination. Title passes to the Postal Service when delivery is made to the carrier. The supplier's risk is limited to loss or damage caused by improper marking or packing of the goods. The Postal Service usually uses Government Bills of Lading (GBLs) to obtain and pay for transportation and related services from commercial carriers.

2. The f.o.b. point is determined on the basis of overall cost. The purchase team should consider that lower freight rates may be available, and that Postal Service-controlled transportation may be available. Assistance in determining transportation costs is available from Materials Management, Purchasing and Materials, Postal Service Headquarters.

2.2.5.g Acceptance. When goods are being accepted at destination, delivery terms in the purchase document must specify f.o.b. destination.

2.2.5.h Using Mail

1. Unless delivery will be made by the supplier's own personnel or equipment, delivery of mailable items (according to the Domestic Mail Manual) to postal facilities must be made by the Postal Service. This requirement may be waived by the contracting officer if in the best interest of the Postal Service.

2. Large mailings that exceed 500 pieces must be coordinated with the area distribution network office. This must be done by the contracting officer or contracting officer's representative at least 30 days before shipment to minimize problems during receipt and processing.

2.2.5.i Clause. Except for purchases of commercial items, contracts specifying an f.o.b. point must include Clause 2-9, Definition of Delivery Terms and Supplier's Responsibilities.

2.2.6 Liquidated Damages

2.2.6.a General. Liquidated damages are a contractual remedy the Postal Service may use when there are delays in delivery or performance. Liquidated damages are based on an estimate of daily losses that would result directly from a delay in delivery or performance. It is important to remember that providing for liquidated damages usually increases the contract price; therefore, their use should be carefully considered.

2.2.6.b Use

1. Generally, liquidated damages are included in all construction contracts, and may be included in other contracts when:

(a) The Postal Service may suffer disruption of mail service or substantial financial loss due to a delay in delivery or performance;

(b) Delivery or performance is so critical that the probable increase in contract price is warranted; and

(c) The amount of actual damages would be difficult or impossible to prove.2.

3. Liquidated damages may not be used as a penalty for failure to deliver or perform on time.

2.2.6.c Rate. The rate of liquidated damages must represent the best estimate of the daily damages that will result from delay in delivery or performance. A rate lower than the actual estimated rate may be used to avoid excessive price contingencies in proposals. The contracting officer must determine and document in each case that the rate is reasonable and not punitive. The rate should, at the minimum, cover the estimated cost of inspection and supervision for each day of delay. Whenever the Postal Service will suffer other specific damages due to a supplier's delay, the rate should also include an amount for these damages. Examples of specific damages are:

1. The cost of substitute facilities.

2. The cost of lost workhours/productivity.

3. Rental of buildings or equipment.

4. The cost of additional inspection.

2.2.6.d Assessment. If appropriate to reflect the probable damages, considering that the Postal Service may terminate for default or take other action, the assessment of liquidated damages may be in two or more increments with a declining rate as the delay continues. To prevent an unreasonable assessment of liquidated damages, the contract may also include an overall maximum dollar amount, a period of time during which liquidated damages may be assessed, or both.

2.2.6.e Clause. Whenever liquidated damages will be assessed for a supplier's delay, the contract must include Clause 2-10, Liquidated Damages, modified as necessary.

2.2.7 Postal Service Property

2.2.7.a Policy. The Postal Service may provide materials or other property to suppliers when it will result in significant economies, standardization, expedited production, or when it is in the Postal Service's interest.

2.2.7.b Solicitations. The property to be furnished must be specified in the solicitation in sufficient detail (including requisitioning procedures) to enable offerors to evaluate it accurately.

2.2.7.c Special Tooling and Test Equipment

1. The purchase team may decide to provide Postal Service special tooling and test equipment to suppliers for use in contract work, if doing so will not disrupt programs of equal or higher priority, or it is in the Postal Service's best interests.

2. Contracts authorizing the furnishing of special tooling or test equipment must contain:

(a) A complete description of the tooling or equipment;

(b) The terms and conditions of shipment; and

(c) The terms covering the cost of adaptation and installation.

3. In competitive purchases when Postal Service special tooling or test equipment is not available, suppliers ordinarily provide and retain title to special tooling and test equipment required for contract performance. Competition usually results in fair charges for amortizing the costs of such tooling and equipment. In noncompetitive situations, the Postal Service should obtain the special tooling or test equipment, or the rights to it, because it may facilitate future competition.

4. When special tooling or equipment is provided by the supplier, the purchase team should decide whether to purchase the tooling or equipment, or rights to it, by considering:

(a) Future needs for the items (including in-house use);

(b) The estimated residual value of the items;

(c) The added administrative burden of reporting, record-keeping, preparation, handling, transportation, and storage;

(d) The feasibility and probable cost of making the items available to other offerors in future purchases;

(e) The amount, if any, offered by the supplier for the right to keep the items; and

(f) The effect on future competition and prices;

5. When the Postal Service obtains identifiable special tooling or test equipment under a contract, the solicitation must specify each item or category as a contract line item. A category of items costing less than $1,000 may be grouped as a single line item.

6. When there is a possibility of future purchases of the same item and the purchase team has decided not to obtain rights or title, the solicitation must indicate current estimates of the future requirements, in the interest of reducing amortization charges. Offerors must be cautioned that these are only estimates and not a guarantee to purchase future quantities.

2.2.7.d Clauses

1. When the Postal Service will furnish property, include one of the following clauses in the contract:

(a) Clause 2-11, Postal Service Property - Fixed-Price, when a fixed-price contract will be awarded and the total value of Postal Service property is $50,000 or more. If the contract provides for reimbursement of costs for certain materials, use the clause with its alternate paragraph c.

(b) Clause 2-12, Postal Service Property - Short Form, when a fixed-price, time-and-materials, or labor-hour contract will be awarded and the total value of Postal Service property is less than $50,000.

(c) Clause 2-13, Postal Service Property - Non-Fixed-Price, when a cost-reimbursement, time-and-materials, or labor-hour contract will be awarded with Postal Service property valued at $50,000 or more. If the contract is for basic or applied research at a nonprofit institution of higher education or nonprofit organization whose primary purpose is to conduct scientific research, use the clause with its alternate paragraph c.

2. When Postal Service property will be furnished "as is," the contract must also include Clause 2-14, Postal Service Property Furnished "As Is."

3. Clause 2-15, Special Tooling, or Clause 2-16, Special Test Equipment, must be included in solicitations for fixed-price contracts when the rights or title to special tooling or test equipment will be required but cannot be identified as a specific line item. Rights or title to special tooling or test equipment in a cost-reimbursement contract is obtained using Clause 2-13, Postal Service Property - Non-Fixed-Price.

4. When a contract is for repair of Postal Service property, and the property is valued under $10,000, no Postal Service property clause is required.

2.2.8 Options

2.2.8.a Use

1. Option clauses may be included in contracts when increased requirements are foreseeable during the contract period, or when continuing performance past the original period is in the best interest of the Postal Service. Option clauses may require that additional quantities be priced the same as the basic quantities or at a different price. The clauses may also allow for unpriced options at the time of award. The price for these options are subject to discussions when the option is exercised. Priced options may require suppliers to guarantee prices for definite time periods, with no guarantee that the option will be exercised. Their improper use may result in unfair prices to the Postal Service or an unfair financial burden on the supplier. When additional requirements are foreseeable and subsequent competition would be impracticable because of factors such as production lead time and delivery requirements, the use of priced options may be preferable to negotiating a price later when the supplier is the only practicable source.

2. Contracts containing priced options that exceed 5 years must include an economic price adjustment clause (see 2.4.3.c and 2.4.3.d).

3. Option provisions and clauses may not be included in contracts when:

(a) The supplier would be required to incur undue risks (as when the price or availability of necessary materials or labor is not reasonably foreseeable);

(b) An indefinite quantity or requirements contract is appropriate, except that options for continuing performance may be used;

(c) Market prices for the supplies or services involved are likely to change substantially; or

(d) The option quantities represent known firm requirements for which funds have been budgeted and approved, unless (a) the basic quantity is a learning or testing quantity and there is some uncertainty as to supplier or equipment performance, and (b) realistic competition for the option quantity is impracticable once the initial contract is awarded.

2.2.8.b Evaluating Options

1. Options need not be evaluated to award a contract when:

(a) The option would have no effect on the outcome of the evaluation (when the option quantity must be offered at the same price as the basic quantity, the option is for a time extension only, or the option is unpriced); or

(b) When there is a reasonable certainty that funds will not be available to exercise the option.

2. When options will not be evaluated, the contract file must contain the rationale for the decision. When the purchase team decides before issuing the solicitation that options will not be evaluated, the solicitation must include Provision 2-4, Evaluation Exclusive of Options or Provision 2-5, Evaluation Exclusive of Unpriced Options. In all other cases, solicitations including options must contain Provision 2-3, Evaluation of Options.

2.2.8.c Setting Limits. The contract must limit the additional quantities of supplies or services that may be purchased or the duration of the period for which performance of the contract may be extended under the option, and must fix the period within which the option may be exercised. This period should be set to give the supplier adequate notice for performance under the option. In fixing the period, consider the lead time needed to ensure continuous production and the time required for additional funding and other approvals. The period for exercising the option should always be kept to a minimum. When a solicitation contains an option for additional quantities of supplies at prices no higher than those for the initial quantities, care should be taken to ensure that the option quantities are reasonable and do not cause the supplier financial hardship. The quantities or the period under option and the period during which the option may be exercised must be justified and documented in the contract file by the contracting officer.

2.2.8.d Prices. The solicitation may allow varying prices to be offered for the option quantities depending on the quantities actually ordered and the dates when ordered. If so, the solicitation must specify the price at which the options will be evaluated (for example, highest option price offered or option price for specified quantities or dates).

2.2.8.e Expressing Options in a Contract. An option for increased quantities may be expressed as (1) a percentage of specific line items; (2) a number of additional units of specific line items; or (3) additional numbered line items (identified as the option quantity) with the same name as the items initially included in the contract. An option for increased services (including construction) may similarly be expressed in terms of (1) percentages; (2) increases in specific line items; or (3) additional numbered line items expressed in the units of work initially used in the contract (for example, labor hours, square feet, or pounds or tons handled). When exercising the option would result in extending the duration of the contract, the option may be expressed in terms of an extended completion date or an additional time period.

2.2.8.f Clauses. When a priced option will be used, the solicitation must include either Provision 2-3, Evaluation of Options, or Provision 2-4, Evaluation Exclusive of Options. When an unpriced option will be used, the solicitation must include Provision 2-5, Evaluation Exclusive of Unpriced Options. In addition, the contract must include one of the following clauses:

1. Clause 2-17, Option for Increased Quantity, must be used when the contract gives the option quantity as a percentage of the basic contract quantity or as an additional quantity of a specific line item.

2. Clause 2-18, Option Item, must be used when the contract identifies the option quantity as a separately-priced line item having the same name as a corresponding basic-contract line item.

3. Clause 2-19, Option to Extend (Service Contract) must be used when it is intended to extend the services to be performed and written notice of intent to extend the contract is not required (see 2.2.8.f.4).

4. Clause 2-20, Option to Renew (With Preliminary Notice), must be used to provide for continuing performance of the contract beyond its original term and it is necessary to include in the contract a requirement that the Postal Service will give the supplier a preliminary written notice of its intent to extend the contract.

5. Clause 2-25, Unpriced Options, must be used when the contract provides for unpriced options.

6. Care must be exercised to ensure that the schedule of any contract which contains one of the above option clauses includes the information relating to the option which the clause requires, i.e. notice of intent to renew.

2.2.8.g Exercising Options. See 6.5.1.f.

2.2.9 Multiyear Contracts

2.2.9.a General. The purchase team should analyze the marketplace and recurring needs to determine whether there are benefits to contracting beyond 1 year. Longer term contracts tend to benefit the Postal Service by developing and sustaining supplier relationships and reducing administrative effort and cost. In addition, savings may be obtained if the supplier can reduce overall prices by spreading startup costs over more than a year or making similar commitments with major subcontractors. There is no limit on the term of a multiyear contract, except that it must reasonably reflect foreseeable requirements.

2.2.9.b Solicitations. When the purchase team determines that multiyear savings are possible and recurring needs reasonably certain, the solicitation should include both a single and a multiyear quantity to see which price is most advantageous. However, award must be made to the offeror proposing the best value.

2.2.9.c Types. See 2.4.10.

2.2.10 Value Engineering

2.2.10.a General. Value engineering is a method of encouraging suppliers to independently develop and propose changes to improve an end item, the way it is produced, or the way a contract is performed. The change must reduce the contract's cost and not impair the essential characteristics or functions of the product or service. Savings are shared by both parties, and the supplier is paid allowable development and implementation costs.

2.2.10.b Definition. A value engineering change proposal (VECP) is a proposal that:

1. Requires a change to a current contract;

2. Results in savings to the contract; and

3. Does not involve a change in:

(a) Deliverable end items only;

(b) Test quantities due solely to the results of previous testing under the contract; or.

(c) Contract Type only.

2.2.10.c Sharing Savings. If the Postal Service accepts a value-engineering change proposal, the supplier shares in the contract savings based on a negotiated agreement contained in Clause 2-22, Value Engineering Incentive. The savings are calculated by subtracting (1) the estimated cost of performing the contract with the change, (2) the Postal Service costs to develop and implement the proposal, and (3) the supplier's allowable development and implementation costs from the price of the current contract. "Postal Service costs" include the cost of testing, operations, maintenance, logistics support, and furnished property. They do not include the normal administrative costs of administering the change. The supplier's "development and implementation costs" include the costs of developing, testing, preparing, and submitting the proposal. They include the supplier's cost of making changes to the contract resulting from the Postal Service's acceptance of the proposal. If the current contract included options, option prices are adjusted according to the calculation. Profit is excluded when calculating contract savings.

2.2.10.d Noncompetitive Purchases

1. Subject to the requirements of Management Instruction AS-710-96-7, Noncompetitive Purchases, the purchase team may decide to have the contracting officer negotiate a noncompetitive contract or contract modification for an additional quantity incorporating a change proposal when:

(a) An otherwise acceptable value-engineering change proposal is received too late during performance to provide a significant benefit under the current contract; or

(b) If additional quantities are required that are not provided for under the contract.

2. When a proposer who does not have a current contract submits an unsolicited proposal in the form of a value-engineering change proposal and it meets the requirements of Clause 2-22, the purchase team may decide to have the contracting officer negotiate a noncompetitive contract incorporating the value-engineering change proposal.

3. Sharing contract savings is done in accordance with 2.2.10.c.

2.2.10.e Evaluation

1. Generally the purchase team will evaluate a value-engineering change proposal and either accept it or reject it, in whole or in part, within 45 days of its submission to the contracting officer. To expedite the evaluation, suppliers may give oral presentations to the purchase team (or an evaluation team created by the purchase team).

2. If evaluating the proposal will take more than 45 days, the contracting officer must notify the proposer of the expected decision date.

3. If a proposal is rejected, the contracting officer must notify the proposer and explain the rejection.

2.2.10.f Withdrawal. The supplier may withdraw all or part of a value-engineering change proposal any time before it is accepted by the Postal Service.

2.2.10.g Acceptance

1. Acceptance of all or part of a value-engineering change proposal and determination of the savings requires the agreement of both parties. Acceptance is accomplished by a supplemental agreement to the contract. If agreement on price is reserved for a later supplemental agreement, but agreement cannot be reached, the matter must be treated as a dispute under Clause B-9, Claims and Disputes.

2. The supplier must perform according to the existing contract until a value-engineering change proposal is accepted.

3. The contracting officer's decision to accept or reject all or part of a value-engineering change proposal is final and not subject to Clause B-9, or to litigation under the Contract Disputes Act of 1978 (41 U.S.C. 601-613).

2.2.10.h Subcontracts. If the purchase team foresees a potential cost reduction through value engineering under subcontracts, additional paragraph j should be added to Clause 2-22.

2.2.10.i Clause. If there is a potential for savings through value engineering, Clause 2-22 should be included in firm fixed-price contracts of $100,000 or more, at any time during the term of the contract. However, the clause may not be used in:

1. Fixed-price incentive contracts (see 2.4.3.b).

2. Research and development contracts.

3. Contracts with nonprofit or educational organizations.

4. Contracts for professional or consultant services (see and ).

5. Contracts for product or component improvement.

6. Contracts for commercial items.

2.3 Specifications and Statements of Work

2.3.1 Use

2.3.1.a Specifications

1. Specifications are generally used when purchasing an end item rather than a service. Specifications must state the Postal Service's needs completely, considering the nature of the commodities being purchased.

2. Specifications may be stated in terms of:

(a) Function, so that a variety of commodities may be considered;

(b) Performance, including the range of acceptable characteristics or the minimum acceptable standards; or

(c) Design requirements, providing exact dimensions, materials or characteristics.

3. In order to enhance competition and invite innovation, specifications and statements of work should be written in as non-restrictive a manner as possible.

2.3.1.b Statements of Work

1. Statements of work (SOWs) are generally used when purchasing a service rather than an end product. SOWs may include specifications or product descriptions. SOWs must describe the work as precisely as practicable and in enough detail to allow a best value decision.

2. After award, SOWs are the standard for measuring performance, and are used by both parties to determine rights and obligations under the contract.

2.3.1.c Product Descriptions

1. Whenever standard or modified commercial products will meet Postal Service requirements, product descriptions must be used instead of specifications.

2. Product descriptions should include:

(a) A common generic identification of the item.

(b) Known acceptable brand-name products, identified by model or catalog number, and the commercial catalogs in which they appear.

(c) The name and address of the manufacturer, or distributor of each brand-name product referenced.

(d) The application or use of the product.

(e) A description of any required modification.

3. If at least three acceptable brand names are specified, the solicitation may provide that only those specified will be considered.

4. Except for construction specifications, if fewer than three acceptable brand name products are specified, or if proposals for equivalent products other than those specified will be considered:

(a) The product description must include a description of the item's essential characteristics, such as material, size or capacity, the equipment with which the item will be used, and any restrictive operating environment conditions;

(b) The brand name in the product description must be followed by the words "or equal."

(c) Space must be provided for suppliers to identify the manufacturer's brand names and models or catalog numbers proposed (see A.2.3.b.6);

(d) The solicitation must include Provision 2-8, Brand Name or Equal.

2.3.2 Technical Data Packages

2.3.2.a General. A Technical Data Package (TDP) is a complete set of documentation which may include specifications, engineering drawings, or associated lists required to build and support an end item. Every TDP is under the control of a design-responsible organization (such as Engineering, Research and Development, or the Mail Equipment Shops) which maintains the integrity of the end-item's design.

2.3.2.b Responsibilities.When a purchase will be made using a TDP, the purchase team must use the most current version. Any modifications to a TDP before or during solicitation or after award must, before implementation, be coordinated with and approved by the design-responsible organization as well as with the requesting organization.

2.3.2.c Deliverables. When a TDP will be purchased, the contracting officer must ensure that the design-responsible organization reviews all supplier submittals to ensure that the final product is in accordance with Postal Service standards and the terms and conditions contained in the contract. Once the purchase team determines TDP requirements, they should not be negotiated without the purchase team's concurrence.

2.3.3 Component Parts

When component parts in a deliverable contract line item are described in the specifications by a brand or manufacturer's name, the contract must include Clause 2-21, Component Parts.

2.3.4 Construction Specifications

The supplier may seek approval to substitute equal products or processes for those specified by brand name (see Clause B-63, Materials and Workmanship). Accordingly, the solicitation should identify any products or processes that may not be substituted after award.

2.4 Types of Contracts

2.4.1 General

2.4.1.a Planning. Selecting the most effective contract type for a purchase is an important element of purchase planning and must be considered together with the issues of price, risk, uncertainty, and responsibility for costs.

2.4.1.b Risk and Responsibility. The type of contract used should reflect the cost risk and responsibility assumed by the supplier. Full cost responsibility is assumed under a firm fixed-price contract, while there is minimal cost responsibility under a cost-reimbursement contract. The profit or fee arrangement should also reflect the cost responsibility assumed.

2.4.1.c Flexibility. Any type of contract described in this section may be used, as appropriate to the purchase. The contract types discussed in this section are those used most frequently for Postal Service purchasing. The contracting officer, working with the purchase team, may decide to use a type of contract not described in this section, subject to the approval of the manager of Headquarters Purchasing, Field Customer Support, Major Facilities Purchasing, or National Mail Transportation Purchasing. This decision must be based on the particular requirements of the purchase or the practices of a particular industry, trade, or profession.

2.4.2 Selecting a Contract Type

2.4.2.a Responsibilities. The contracting officer, working with the purchase team is responsible for selecting and negotiating the most advantageous contract type appropriate to the purchase.

2.4.2.b Provision and Clause. Although contract type is a matter for negotiation, the solicitation should specify a particular type of contract in order to provide a basis for comparing proposals. If appropriate, the solicitation may allow suppliers to provide alternate proposals containing a different contract type. Provision 2-6, Type of Contract, must be included in all solicitations. Clause B-3, Contract Type, must be included in all contracts awarded without issuing a written solicitation. A cost plus a percentage-of-cost contract may not be used.

2.4.2.c Considerations

1. A firm fixed-price contract makes the supplier fully responsible for cost control and minimizes the need to monitor performance. But if no reasonable basis for firm pricing exists, requiring a firm fixed-price contract may reduce competition and lead to higher prices (suppliers add allowances for contingencies to protect them from risks). Whenever the probable cost of contract performance cannot be realistically estimated, a firm fixed-price contract should not be used.

2. When a firm fixed-price contract cannot be used, costs can still be controlled by using incentives. Efficient performance can be promoted by relating the profit or fee to effective cost management by the supplier.

3. Cost-reimbursement contracts are suitable when uncertainties do not permit costs to be estimated with sufficient accuracy to use any type of fixed-price contract.

4. Factors to be considered in deciding contract type include the:

(a) Realism of the cost estimate.

(b) Extent of competition.

(c) Risks and uncertainties.

(d) Complexity of the requirement.

(e) Adequacy and firmness of specifications.

(f) Likelihood of changes.

(g) Past experience (pricing and production).

(h) Extent of subcontracting.

(i) Adequacy of the supplier's estimating and accounting system.

(j) Urgency of the requirement.

(k) Volatility of cost factors.

2.4.3 Fixed-Price Contracts

2.4.3.a Firm Fixed-Price Contracts

1. Description. A firm fixed-price contract establishes a price that will not be adjusted based on performance costs. It places full responsibility on the supplier for all costs and the resulting profit and loss, maximizing the incentive to control costs and perform effectively. It is the least burdensome type of contract to administer (if requirements are stable; but if frequent changes are likely, administration will be difficult).

2. Use. A firm fixed-price contract is suitable for purchasing commercially-available products, or services with reasonably-definitive specifications or statements of work, and whenever fair and reasonable prices can be established at the outset, such as when:

(a) There is adequate price competition (see 5.1.2.b).

(b) Price analysis (see 5.1.2.a) indicates price reasonableness.

(c) In noncompetitive situations, cost or pricing data are adequate to permit realistic estimates of the costs of performance.

(d) The cost impact of performance uncertainties can be estimated closely enough to reach agreement on a reasonable price that represents the risks involved.

2.4.3.b Fixed-Price Incentive Contract

1. Description. A fixed-price incentive contract is a fixed-price contract that provides for adjusting profit and establishing the final price by applying a formula based on the relationship between the total final negotiated cost and total target cost. The contract specifies a target cost, a target profit, a target price, a price ceiling, and a profit-adjustment formula for each item subject to incentive price revision. The price ceiling is the maximum that may be paid to the supplier, except for adjustments specifically provided for under contract clauses. When performance is completed, the final cost is negotiated and the final price is established by applying the formula. When the final cost is less than the target cost, applying the formula results in a profit greater than the target profit; when the final cost is more than target cost, applying the formula results in a profit less than the target profit. If the final negotiated cost exceeds the ceiling, the supplier absorbs the difference. Because the profit varies inversely with the cost, this type of contract provides a positive, calculable profit incentive for the supplier to control costs. Billing prices are established as an interim basis for payment. The billing prices may be adjusted if it becomes apparent that the final negotiated cost will be substantially different from target cost.

2. Use. A fixed-price incentive contract is appropriate when the parties can establish an initial target cost, target profit, and profit-adjustment formula that will provide a fair and reasonable incentive, and a ceiling that provides for the supplier to assume an appropriate share of the risk. When the supplier assumes a considerable or major share of cost responsibility under the adjustment formula, the target profit should reflect that responsibility. For the profit adjustment formula, the supplier's share will usually be in the range of 20-40 percent. The price ceiling is usually established by calculating an amount in the range of 15-30 percent of target cost and adding that result to the target cost.

3. Limitations. Fixed-price incentive contracts should be used when:

(a) The Postal Service wishes to incentivize performance.

(b) A firm fixed-price contract is not suitable.

(c) There is an adequate basis for establishing reasonable firm targets at the time of initial contract negotiations.

(d) The supplier's accounting system is adequate for providing data to support negotiation of final cost and incentive price revision.

2.4.3.c Fixed-Price Contract with Economic Price Adjustment

1. Description. A fixed-price contract with economic price adjustment provides for up and down revision of the price when material prices or labor rates that are defined in the contract are subject to fluctuation. This type of contract establishes a basis for measuring fluctuations so that price adjustments are limited to contingencies beyond the supplier's control and reflect actual market fluctuations. Upward adjustments are limited by establishing a reasonable ceiling, and provisions are included for downward adjustments when prices or rates fall below base levels established in the contract. In establishing the base levels, the contracting officer must ensure that the base does not allow for any contingencies that are also included in the adjustment requested by the supplier under the economic price adjustment clause. Contingency allowances for inflation must be eliminated from the base costs when pricing the contract. There are two types of economic price adjustments:

(a) Adjustments Based on Actual Costs of Labor or Materials. These price adjustments are based on actual increases or decreases in the costs of specified labor or materials during performance.

(b) Adjustments Based on Cost Indexes of Labor or Materials. These price adjustments are based on increases or decreases in labor or material cost standards or indexes specifically identified in the contract.

2. Use

(a) General. Fixed-price with economic adjustment contracts are appropriate when there is serious doubt about the stability of market or labor conditions during an extended period of performance, and when contingencies that would otherwise be included in a firm fixed-price contract are identifiable and can be covered separately in the contract. Their usefulness is limited by the difficulties of administering them.

(b) Adjustments Based on Actual Costs of Labor or Material

(1) A contract may provide for adjustments based on actual costs of labor or material when:

(i) The contract is for longer than 6 months;

(ii) There is no major element of design, engineering, or developmental work involved;

(iii) One or more identifiable labor or material costs are subject to change; and

(iv) Adjustments will be limited to contingencies beyond the supplier's control.

(2) The schedule must describe, in detail, the types of labor and material subject to adjustment, the labor rates (including fringe benefits) and unit prices of materials that may be adjusted, and the quantities of labor and specified materials allocated to each unit of supplies to be delivered. The ceiling on upward adjustments should not exceed the original unit price by more than 10 percent annually for the total of increases to each unit-price adjusted. The supplier must notify the contracting officer within a stated number of days after a change in rates of pay or unit prices for specified materials and propose an adjustment. The contracting officer will negotiate the price adjustment and its effective date. In negotiating adjustments under the clause, the contracting officer must consider work in progress and materials-on-hand at the time of changes in labor rates or materials prices, since these may have a significant impact on equitable price adjustments. Negotiated adjustments must not include any indirect costs, except fringe benefits included in the labor rates subject to adjustment.

(c) Adjustments Based on Cost Indexes of Labor or Material

(1) A contract may provide for adjustments based on cost indexes of labor or material when:

(i) The contract involves an extended period of performance and significant costs will be incurred beyond the first year;

(ii) The amount subject to adjustment is substantial; and

(iii) The economic variables for labor and materials are too unstable to permit a reasonable division of risk between the Postal Service and the supplier without providing for adjustments.

(2) The contracting officer must develop a clause tailored to the purchase, with the assistance of counsel.

2.4.3.d Clauses - Supplies and Services Contracts

1. All fixed-price contracts must include Clause 2-26, Payment - Fixed-Price. All fixed-price incentive contracts must also include Clause 2-27, Incentive Price Revision, filled in.

2. Fixed-price contracts providing for economic price adjustments based on actual costs of labor or materials (see 2.4.3.c.2(b)) must include Clause 2-28, Economic Price Adjustment - Labor and Materials.

3. Fixed-price contracts providing for economic price adjustments based on cost indexes of labor or materials (see 2.4.3.c.2(c)) must include Clause 2-29, Economic Price Adjustment (Index Method) and an adjustment formula.

2.4.4 Cost-Reimbursement Contracts

2.4.4.a General. Cost-reimbursement contracts provide for paying allowable, incurred costs. They establish an estimate of total cost so that funds may be committed and establish a ceiling that the supplier may not exceed (except at its own risk) without the approval of the contracting officer. Cost-reimbursement contracts are suitable when uncertainties about contract performance do not permit costs to be estimated with sufficient accuracy to use a fixed-price contract.

2.4.4.b Limitations. A cost-reimbursement contract may be used only when:

1. The supplier's accounting system can determine the costs that apply to the contract; and

2. Postal Service monitoring during performance will assure that efficient methods and effective cost controls are used.

2.4.4.c Cost Contract. A cost contract is a cost-reimbursement contract under which the supplier receives no fee. A cost contract may be appropriate for research and development, particularly with nonprofit educational institutions or other nonprofit organizations.

2.4.4.d Cost-Sharing Contract. A cost-sharing contract is a cost-reimbursement contract under which the supplier receives no fee and is reimbursed only a portion of its allowable costs as stated in the contract. It is suitable when there is a high probability that the supplier will receive substantial commercial benefits as a result of performance.

2.4.4.e Cost Plus Incentive-Fee Contract

1. Description. A cost plus incentive-fee contract is a cost-reimbursement contract that provides for the fee initially negotiated to be adjusted later by a formula based on the relationship of total allowable costs to target cost. This type of contract specifies a target cost, a target fee, minimum and maximum fees, and a fee-adjustment formula. After performance, the fee is determined by the formula. The formula provides, within limits, for increases in the fee above the target when total allowable costs are less than target cost, and decreases in the fee below the target when total allowable costs exceed the target cost. This increase or decrease provides an incentive for the supplier to manage the contract effectively. When total allowable costs are greater than or less than the range of costs in the fee-adjustment formula, the supplier is paid total allowable costs, plus the minimum or maximum fee.

2. Use. A cost plus incentive-fee contract is suitable when a cost-reimbursement contract is appropriate and a target cost and fee-adjustment formula can be negotiated which will motivate the supplier to manage the contract effectively. The fee-adjustment formula should provide an incentive that covers the full range of reasonably-foreseeable variations from the target cost. The supplier's share of the difference between target cost and actual cost will usually be in the range of 15-30%. If a high maximum fee is negotiated, the contract must provide for a low minimum fee - or even a zero or negative fee. The maximum fee will usually not exceed 10% of the contract's target cost, or 15% for research and development.

2.4.4.f Cost Plus Fixed-Fee Contract

1. Description. A cost plus fixed-fee contract is a cost-reimbursement contract that provides for paying the supplier a negotiated, fixed fee. The fixed fee does not vary with actual costs, but may be adjusted as a result of changes to the contract. This type of contract type gives the supplier only a minimal incentive to control costs.

2. Use. A cost plus fixed-fee contract is suitable when a cost- reimbursement contract is necessary but the uncertainties and risks for the supplier are too great to permit negotiating a reasonable cost plus incentive-fee arrangement.

3. Completion or Level-of-Effort Form. There are two forms of cost plus fixed-fee contracts:

(a) Types

(1) Completion Form. The completion form describes the scope of work by stating a definite goal or target and specifying an end product. This form generally requires the supplier to complete and deliver the end product within the estimated cost, if possible, as a condition for paying the entire fixed fee. If the work cannot be completed within the estimated cost, the Postal Service may require more effort without increasing the fee, but the estimated cost must be increased.

(2) Level-of-Effort Form. The level-of-effort form describes the scope of work in general terms and requires the supplier to devote a specified level of effort for a stated period. Under this form, if performance is satisfactory, the fixed fee is payable when the period ends and the supplier certifies that the level of effort specified in the contract has been expended. Renewal for further periods of performance requires new cost and fee arrangements, and is treated as a new purchase.

(b) Preference. Because of the greater obligation assumed by the supplier, the completion form is preferred over the level-of-effort form whenever the work can be defined well enough to permit a reasonable cost estimate within which the supplier can complete the work.

2.4.4.g Cost-Plus-Award-Fee Contract

1. Description. A cost plus award-fee contract is a cost-reimbursement contract that provides for a fee consisting of a base amount fixed at the beginning of the contract and an award amount that the supplier may earn in whole or in part during performance. The award amount must be sufficient to motivate excellence in areas such as quality, timeliness, technical ingenuity, and cost-effective management. The amount of the award fee is determined by the Postal Service's evaluation of the supplier's performance according to criteria stated in the contract. This determination is made unilaterally by the Postal Service and is not subject to the Disputes clause.

2. Use. The cost plus award-fee contract is particularly suitable for buying services. The likelihood of meeting purchasing objectives and achieving exceptional performance is enhanced under this type of contract. It provides the flexibility to evaluate subjectively, at defined intervals, both actual performance and the conditions under which performance was achieved. The additional administrative effort, contract amount, performance period, and cost required to monitor and evaluate performance must be justified by the expected benefits to warrant using this type of contract.

3. Performance Evaluation. Cost plus award-fee contracts provide for evaluation at stated intervals during performance, so that the supplier is periodically informed of the quality of performance and areas for improvement . Evaluation criteria and a rating plan should be prepared for each purchase to motivate the supplier to improve in areas important enough to be rated, but not to the detriment of overall performance. Requirements will vary widely among contracts, so contracting officers must customize the evaluation criteria, rating plan, and even the Award Fee clause, seeking advice from the purchase team and counsel, as needed. The partial payment of the award fee will usually correspond to the evaluation periods to provide incentive. If a high award fee is negotiated, the contract may provide for a low base fee, or even a zero base. The maximum fee, comprising the base fee plus the highest potential award fee, will usually not exceed 10%, or 15% for research and development.

2.4.4.h Clauses

1. All cost-reimbursement contracts must include the following clauses:

(a) Clause 2-30, Allowable Cost and Payment.

(b) Either Clause 2-31, Limitation of Cost (if the contract is fully funded) or Clause 2-32, Limitation of Funds (if the contract is funded in increments).

2. Cost contracts must include Clause 2-33, Cost Contract - No Fee.

3. Cost-sharing contracts must include Clause 2-34, Cost-Sharing Contract - No Fee.

4. Cost plus incentive-fee contracts must include Clause 2-35, Incentive Fee.

5. Cost plus fixed-fee contracts must include Clause 2-36, Fixed Fee.

6. Cost-plus-award-fee contracts must include Clause 2-37, Award Fee.

2.4.5 Time-and-Materials and Labor-Hour Contracts

2.4.5.a Time-and-Materials Contracts

1. Description. A time-and-materials contract provides for purchasing supplies or services on the basis of:

(a) Direct labor hours at specified, fixed hourly rates (which include wages, overhead, general and administrative expenses, and profit); and

(b) Material at cost and, when appropriate, material-handling costs as a part of material costs. Material-handling costs may include all indirect costs, including general and administrative expense allocated to direct materials according to the supplier's usual accounting practices. The material-handling costs may only include costs clearly excluded from the labor-hour rate.

2. Use. A time-and-materials contract is only used when it is impossible to estimate the extent or duration of the work or anticipate costs with reasonable confidence. Because it does not encourage effective control by the supplier, it may only be used when provision is made for adequate monitoring by postal personnel during performance, to reasonably assure that inefficient or wasteful methods are not being used. Examples of situations where this type of contract might be appropriate are:

(a) Repair, maintenance, and overhaul work;

(b) Work to be done in emergency situations; and

(c) Engineering and design services in connection with the production of supplies.

3. Limitation. Time-and-materials contracts may only be used if no other type of contract will do. The contract must establish a ceiling price which the supplier exceeds at its own risk. The contracting officer must document the contract file to show the basis for any change in the ceiling.

4. Optional Method of Pricing Material. When the work to be performed requires the supplier to furnish material that is regularly sold to the general public by the supplier in the normal course of business, the contract may provide for charging material on a basis other than at cost if:

(a) The total estimated contract price does not exceed $50,000 or the estimated price of material does not exceed 20% of the estimated contract price;

(b) The material is identified in the contract;

(c) No profit on material is included in the profit in the fixed hourly labor rates; and

(d) The contract provides that the price to be paid for the material must be the established catalog or list price in effect when material is furnished, less all applicable discounts, and not exceeding the supplier's sales price to its most favored customer for the same item in like quantity or the current market price, whichever is lower.

2.4.5.b Labor-Hour Contracts. A labor-hour contract is a variant of the time-and-materials contract, differing only in that materials are not supplied by the supplier. All the requirements of paragraph a above, except those dealing with materials, apply to labor-hour contracts.

2.4.5.c Clause. Time-and-materials and labor-hour contracts must include Clause 2-38, Payment (Time-and-Materials and Labor-Hour Contracts).

2.4.6 Indefinite-Delivery Contracts

2.4.6.a General

1. Indefinite-delivery contracts are used when the desired period of performance is known, but the exact time of delivery is unknown at the time of award. They establish the supplies or scope of services that can be ordered, terms and conditions, the maximum liability of the Postal Service, and prices. Orders placed against indefinite-delivery contracts are not subject to the noncompetitive procedures discussed in 3.5.5.

2. Indefinite delivery contracts may provide for delivery of a definite quantity, an indefinite quantity within a minimum and maximum, or the Postal Service's requirements. During the contract term, delivery orders are issued by purchasing organizations or users.

3. The pricing structure of any normal contract type can be used for orders against indefinite-delivery contracts. Fixed-price orders are preferred unless the orders cannot be accurately priced before issuing each order. In that case, time-and-materials or labor-hour orders are preferred. The pricing mechanism may even be left to the judgment of the contracting officer at the time of issuing each order. The contracting officer, in that case, must ensure that the contract clearly provides for each type of pricing. In addition, if so desired by the purchase team, the contract may provide for alternative pricing for each order (for example, an order may be placed at a fixed price, or at a time and materials rate).

2.4.6.b Definite-Quantity Contracts. A definite-quantity contract provides for a definite quantity of specific supplies or services during the contract period, with deliveries to designated locations when ordered.

2.4.6.c Indefinite-Quantity Contracts

1. An indefinite-quantity contract provides for an indefinite quantity of specific supplies or services, within a stated minimum and maximum, to be delivered during the contract period to designated locations when ordered. It is used when precise requirements for supplies or services ordered over the term of the contract, above known minimums, cannot be determined. The minimum and maximum are provided to limit the pricing risk to the supplier.

2. The contract must require the Postal Service to order, and the supplier to deliver, a minimum quantity of supplies or services over the term of the contract, and requires the supplier to deliver any additional quantities ordered, not to exceed a maximum amount.

3. The minimum quantity must not exceed known requirements, and the maximum quantity must be realistic. The contract may specify minimum or maximum quantities for individual delivery orders, and a maximum that may be ordered during a specified time.

4. Contract maximums may be exceeded upon the mutual agreement of the Postal Service and the supplier.

2.4.6.d Requirements Contracts

1. A requirements contract provides for filling all or specified portions of actual purchase requirements of designated activities for specific supplies and services to be delivered as ordered over the term of the contract. It is used for recurring requirements anticipated during the contract period, where precise quantities cannot be determined. It may also be used to obtain supplies and services in excess of quantities that activities themselves can furnish within their own capabilities. A requirements contract is preferred when the purchase team decides to award a requirements contract to only one source and requirements can be estimated with reasonable accuracy.

2. The solicitation and contract must state an estimated total quantity, and, if feasible, the maximum limit of the supplier's obligation to deliver and the Postal Service's obligation to order. The total-quantity estimate must be as realistic as possible, based on records of previous requirements and current information. The contract may specify minimum or maximum quantities for individual delivery orders, and a maximum that may be ordered during a specified time.

3. When a requirements contract is for repair, modification, or overhaul of Postal Service property, the solicitation must state that failure of the Postal Service to furnish such items in the amounts described as "estimated" or "maximum" will not entitle the supplier to any price adjustment under the Postal Service Property clause.

2.4.6.e Ordering

1. The period for placing orders and the activities authorized to place orders must be identified in the contract.

2. Delivery orders or task orders are used to order against an indefinite delivery contract. A delivery order is used principally for supplies and a task order for services.

3. Ordinarily, orders should be placed:

(a) In writing;

(b) By authorized Postal Service credit card;

(c) By written telecommunication;

(d) By electronic data interchange (EDI); or

(e) Orally.

4. Orders must contain:

(a) The date of the order, contract number, and order number.

(b) Item number and description, quantity, and unit and total price or a ceiling price limiting the Postal Service's liability if the price cannot be negotiated before issuing an order.

(c) Place and date of delivery or performance.

(d) Packaging, packing, and shipping instructions, if any.

(e) Accounting and fiscal data.

(f) Any other pertinent information, including a statement of work that describes the services to be performed.

2.4.6.f Multiple Awards

1. The contracting officer may consider making multiple awards of indefinite-quantity contracts under a single solicitation for the same or similar supplies or services to two or more sources. The decision to make multiple awards and to compete individual orders should not be made if:

(a) The supplies or services are unique or highly specialized and only one supplier is capable of performing at the required level of quality.

(b) A single award will result in more favorable terms and conditions, including pricing.

(c) The cost of administering multiple contracts may outweigh the benefits.

(d) Tasks likely to be ordered are so integrated that only a single supplier can reasonably perform the work.

(e) The order is a logical follow-on to an order already issued under the contract.

(f) It is necessary to place an order to satisfy a minimum guarantee.

(g) The contracting officer determines that multiple contract awards or competition for a particular order are not in the Postal Service's best interest.

2. Competitive delivery and task orders should be awarded based on price and past performance on previous orders and, in some cases, an oral presentation covering how the task will be performed and resumes of key personnel. Participation by suppliers in the competition for orders is optional, so contracting officers must ensure that a sufficient number of suppliers can be expected to compete.2.4.6.g

2.4.6.h Provisions. For contract where orders will be placed by authorized Postal Service credit card, the solicitation must include Provision 2-7, Credit Card Order Acceptance Requirement.

2.4.6.i Clauses

1. All delivery order, task order and definite order contracts must include the following clauses:

(a) Clause 2-39, Ordering.

(b) Clause 2-40, Delivery-Order Limitations.

2. All definite-quantity contracts must include Clause 2-41, Definite Quantity.

3. All indefinite-quantity contracts must include Clause 2-42, Indefinite-Quantity.

4. All requirements contracts must include Clause 2-43, Requirements. When purchasing requirements in excess of the quantities that the activities can furnish within their own capabilities or only specified portions of requirements (see paragraph d), use the clause with its alternate paragraph c.

2.4.7 Ordering Agreements

2.4.7.a General

1. An ordering agreement is not itself a contract. It is a written agreement negotiated between a purchasing activity and a supplier that contains terms and conditions applying to future contracts between the parties. The contracts are established when orders are issued and accepted by the parties. Ordering agreements include Basic Pricing Agreements (BPAs) (see 2.4.8). Although there is a price ceiling for individual orders, there is no limit on the aggregate value of orders and no commitment to purchase. This distinguishes ordering agreements from indefinite-delivery contracts.

2. An ordering agreement is useful for expediting contracting for uncertain requirements of supplies or services when specific quantities and prices are not known at the time the agreement is signed, but substantial quantities of the supplies or services are expected to be purchased. Ordering agreements reduce administrative lead time and inventory investment.

2.4.7.b Limitations

1. An ordering agreement may not state or imply any obligation or agreement by the Postal Service to place future contracts or orders with the supplier.

2. An ordering agreement may only be changed by modifying the agreement itself and not by individual orders issued against it. Modifying an ordering agreement does not retroactively affect orders previously issued against it.

3. An ordering agreement extending for more than 1 year must be reviewed annually to determine whether it should be continued.

2.4.7.c Content of the Agreement. An ordering agreement must:

1. Describe the supplies and services to be provided.

2. Describe the method for determining prices.

3. Include delivery terms and conditions or specify how they will be determined.

4. List the activities authorized to issue orders.

5. Specify the point at which each order becomes a binding contract (for example, issuance of the order, acceptance of the order in a specified manner, or failure to reject the order within a specified number of days).

6. Provide that failure to reach agreement on the price of any one order issued before a price is established (see 2.4.7.e) is a dispute under Clause B-9, Claims and Disputes.

7. Contain the clauses prescribed for the type of contract represented by the orders to be placed. (For clauses prescribed according to contract dollar amount, the aggregate value of orders expected to be placed must be estimated.)

2.4.7.d Ordering. A contracting officer representing any activity listed in an ordering agreement may issue orders for supplies or services covered by that agreement. Except for orders under mandatory ordering agreements, competition must be obtained before placing an order, unless precluded by compelling urgency or other good reason in the Postal Service's interest. Competition may be by oral or written solicitation among firms holding ordering agreements for the same supplies or services, or on the open market. If an order is placed without obtaining competition, the file must be documented to show the reason.

2.4.7.e Pricing. The contracting officer may not authorize the supplier to begin work on an order under an ordering agreement until prices have been established, unless urgency precludes advance pricing and the order establishes a ceiling price limiting the Postal Service's obligation. Pricing must be accomplished as soon as possible after issuance of an unpriced order.

2.4.8 Basic Pricing Agreements (BPAs)

2.4.8.a General. A basic pricing agreement (BPA) is an ordering agreement which permits individuals designated by name or title to place orders by telephone, over-the-counter or in writing. BPAs permit consolidated invoicing (usually monthly) for all purchases made. Establishing BPAs with suppliers from which frequent, repetitive purchases are made can significantly reduce paperwork and administrative costs. Although there is a ceiling for individual orders (see 2.4.8.d.4), there is no aggregate value of orders under a BPA. When the BPA is limited to specific items on a price list, only those items may be ordered. Suppliers may revise their prices at any time.

2.4.8.b Use. BPAs are used when:

1. A wide variety of items in a broad class of supplies (hardware, electrical supplies, etc.) may be available from suppliers but quantities and delivery requirements are not known and may vary considerably. BPAs may also be used for services.

2. The preparation of numerous written orders and processing of invoices can be avoided.

3. There is a need to provide supply sources for offices that do not have purchasing authority.

4. A purchase or series of purchases from a particular supplier may not be made using local buying procedures.

2.4.8.c Sources. BPAs should be established with suppliers from which numerous individual purchases will likely be made in a given period. For example, if experience shows that a supplier is dependable and consistently lower in price than other suppliers, and if numerous small purchases are made from them, is would be advantageous to establish a BPA with the supplier.

2.4.8.d Restrictions. The following restrictions apply to BPAs:

1. BPAs may not be made for supplies or services which must be purchased from mandatory sources (see 3.3).

2. BPAs may not be made for construction on Postal Service premises.

3. The term of a BPA may not exceed five years.

4. Individual orders may not exceed $10,000 (except for fuel, where the ordering limit is tank capacity).

2.4.8.e Ordering. When orders are placed under a BPA established for specific items on a price list, only the items on the list may be ordered.

2.4.9 Letter Contracts

2.4.9.a Description. A letter contract is a written preliminary contractual instrument that authorizes the supplier to begin work immediately, before a definitive contract is negotiated.

2.4.9.b Use

1. A letter contract is used when:

(a) The requirement demands that the supplier be given a binding commitment so that work can begin immediately.

(b) Negotiating a definitive contract in time to satisfy the requirement is impossible.

2. Each letter contract must be as complete and definitive as possible under the circumstances. When award is based on price competition, an overall price ceiling must be included in the letter.

3. Each letter contract must contain a negotiated definitization schedule including:

(a) A date for submission of the supplier's price proposal.

(b) A date for the start of negotiation.

(c) A target date for definitization, which must be the earliest date practicable.

4. Each letter contract must state the maximum liability of the Postal Service. This is the amount estimated to be needed to cover performance before definitization. It may not exceed 50% of the total estimated cost of the contract.

5. The definitization schedule must provide for definitizing the contract within 180 days after the date of the letter contract or before completion of 40% of the work, whichever occurs first. However, the contracting officer may, in extreme cases, authorize an additional period. Because an undefinitized letter contract is, in effect, a cost-reimbursement contract, it is not in the Postal Service's interest to allow it to continue longer than necessary. Therefore, if after exhausting all reasonable efforts, the contracting officer and the supplier fail to reach an agreement on price or fee, Clause 2-44, Contract Definitization (see 2.4.9.d) requires the supplier to proceed with the work and provides that the contracting officer may determine a reasonable price or fee, subject to appeal as provided in Clause B-9, Claims and Disputes.

2.4.9.c Limitations

1. A letter contract may only be used if no other type of contract is suitable. Its use must be approved by the manager of Materials, Headquarters Purchasing, Field Customer Support, National Mail Transportation Purchasing, or Major Facilities Purchasing.

2. A letter contract may not commit the Postal Service to a definitive contract in excess of the funds available at the time the letter contract is executed.

3. A letter contract may not be modified to add work unless the added work is inseparable from the work being performed under the letter contract.

2.4.9.d Clauses

1. A letter contract must include clauses required for the type of definitive contract contemplated, and any additional clauses known to be appropriate.

2. All letter contracts must include the following clauses:

(a) Clause 2-45, Execution and Commencement of Work.

(b) Clause 2-46, Limitation of Postal Service Liability. Insert as the maximum liability, the amount necessary to cover the supplier's performance before definitization. The maximum liability may not exceed 50% of the estimated cost of the definitive contract unless approved by the manager of Materials, Headquarters Purchasing, Field Customer Support, National Mail Transportation Purchasing, or Major Facilities Purchasing.

(c) Clause 2-44, Contract Definitization, with the definitization schedule established in accordance with subparagraphs 2.4.9.b.3 and 2.4.9.b.5. If the contract is not awarded on the basis of price competition, omit paragraph d of the clause.

(d) Clause 2-47, Payment of Allowable Costs Before Definitization, if a cost-reimbursement definitive contract is contemplated.